Acquisition Finance


Acquisition finance is available from many sources. When a business is being sold, seldom does the buyer pay cash for the acquisition. Even when cash is available, buyer strategies usually involve financing the transaction.

Typical acquisitions take 6-9 months to complete, so the seller will need the buyer to provide some proof up front about their ability to close the transaction. Acquisitions will involve many hours of due diligence, and negotiation. Along with the buyer and seller the acquisition will involve attorneys, accountants, lenders, valuation companies, industry specialists, along with others. No one wants to pursue 6-9 months of work involving a variety of highly paid professionals without having some confidence of the buyer’s ability to close the deal.

The process of acquisition finance will begin with determining the value of the business. There are many companies that offer valuation services. Under certain circumstances an industry specialist should be used for valuing the company instead of a valuation company that has a broader spectrum. In order to complete a valuation the selling company needs to provide up-to-date data. Lenders will not accept a sellers “gut feeling” or a value based on a simple accounting formula. Lenders need to make a decision to finance based on sound and verifiable information.

There are a number of methods to finance a business acquisition. Each can be customized or included with other forms of financing to provide the buyer with the best financing package and the greatest chance for the businesses financial success.

SBA Loans are offered by many lenders for financing an acquisition and these loans are a major source of funding a business acquisition.

Senior Debts which are loans that may or may not be SBA guaranteed will be in first position in the event of default.

Subordinated Debts are loans that will be in a position behind the Senior Debt.

Private Finance, or more commonly called Business Notes, can assist the purchase when the seller is willing to carry some of the financing and risk themselves. Business Notes will be discussed further in upcoming articles on Business Funding Secrets.

Equipment Finance can include Sale Leaseback of the current equipment, or equipment leasing if the new owner will be adding capabilities.

Vendor Finance is commonly used when a larger financially stable vendor wants to ensure they keep the company as a customer. The vendor understands the industry and will have a comfort level with the company’s past inventory turns.

Franchise Financing is often offered by the franchiser.

Cash Flow Finance, including Factoring and Purchase Order Finance, can be obtained when a finance company bases their financing decision on the strength of the company’s contract with a customer.

Personal Loans from company directors, family, or friends maybe needed to offset some of the lenders risk. It is not unusual for a business buyer to use home equity, family jewelry, cash value of life insurance, or other assets to help collateralize a personal loan.

Structuring the transaction is extremely important. The seller of course wants as much money as possible and wants cash. The buyer needs to spread out the debt service and wants to have as little cash as possible invested in the acquisition.

Some industries are in a market where it is more difficult to obtain funding. For the acquisition to be financed, a lender will need a strong understanding of the industry and what, beyond the collateralized assets, the company offers to reduce the perceived risk. One simple example of this is the Pharmacy Industry. Pharmacies have typically been known for generating profits and to be stable businesses. However, they are usually in leased locations, and typically their furniture, fixtures, and computers will only provide $15-20,000 of collateral for a buyer requesting a million dollar loan. A lot of money is tied up in inventory, but the small pills are considered by a lender to easy to move out the door in the event of default. Due to these circumstances many lenders will not loan money to these traditional money making businesses. However, lenders that understand the pharmacy market will lend to a pharmacy.

When pursuing Acquisition Finance, for the best chance of success, make sure the valuation company and the lender have expertise in that industry.

Tips for Acquisition Finance:

1. Attorneys and CPAs who have been representing the seller for many years may see the transaction as putting themselves in a position of losing a client when the business is sold. Make sure they are working diligently on the transaction and are not slowing or undermining the process.

2. Since acquisitions involve 6-9 months and sometimes a couple years, all parties involved need to be aware of time tables. Much to often, items of importance end up sitting on the desk of someone that is outside of the control of the buyer or seller.

3. All financial information needs to be current. Over the lengthy process the data supplied to both the buyer and the lender will need to be updated on a continuous basis. Things can change drastically during a nine month period and the seller will need to continually prove the financial condition of the company.

4. When the transaction involves international circumstances, expect the expenses, up-front fees, lender fees, and closing costs to be considerably more than a domestic transaction.

To Your Capital Success,
Brad MacLiver
Specialist in Targeted Acquisitions, Business Funding, and Growth Strategies.